Income Taxes

The following is a geographic breakdown of the provision for income taxes (in thousands):



	Years Ended
	December 27, 2014			December 28, 2013			December 29, 2012
Current:
Federal	$	—		$	—		$	(133	)
State	446			(135		)	22
Foreign	2,423			1,719			2,169
Total current	$	2,869		$	1,584		$	2,058
Deferred:
Federal	$	—		$	—		$	—
State	—			—			—
Foreign	(116		)	70			132
Total deferred	$	(116	)	$	70		$	132
Total provision	$	2,753		$	1,654		$	2,190

Income before provision for income taxes from international operations was $5.6 million, $5.8 million and $5.5 million for the years ended December 27, 2014, December 28, 2013 and December 29, 2012, respectively.

The provisions for income taxes differ from the amount computed by applying the statutory federal income tax rates as follows:



	Years Ended
	December 27, 2014		December 28, 2013		December 29, 2012
Expected tax at federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.8	%	0.3	%	—	%
Research credits	(11.4	)%	4.9	%	—	%
Stock-based compensation	14.7	%	(12.2	)%	(3.9	)%
Change in valuation allowance	(25.3	)%	(34.2	)%	(33.5	)%
Other	2.0	%	0.8	%	(0.2	)%
Effective tax rate	16.8	%	(5.4	)%	(2.6	)%

The Company recognized income tax expense of $2.8 million on income before income taxes of $16.4 million, $1.7 million on loss before income taxes of $30.5 million and $2.2 million on loss of $83.1 million in fiscal years 2014, 2013 and 2012, respectively. The resulting effective tax rates were 16.8%, (5.4)% and (2.6)% for 2014, 2013 and 2012, respectively. The 2014 effective tax rate differs from the expected statutory rate of 35% based upon the utilization of unbenefited U.S. loss carryforwards , offset by state income taxes and foreign taxes provided on foreign subsidiary earnings. The 2013 and 2012 effective tax rates reflect unbenefited current U.S. losses and foreign taxes provided on our profitable foreign subsidiaries. The increase in 2014 tax expense compared to 2013 tax expense relates primarily to higher state income taxes because of the profitable position of the U.S. operations, additional tax reserves and an increase in taxable foreign profits. The decrease in 2013 tax expense compared to 2012 tax expense relates primarily to the release of tax reserves due to the lapsing of the statute of limitations.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):



	Years Ended
	December 27, 2014			December 28, 2013
Deferred tax assets:
Net operating losses	$	107,601		$	123,908
Research credits	37,435			33,647
Nondeductible accruals	31,151			26,365
Inventory valuation	19,625			13,540
Property, plant and equipment	1,387			1,453
Intangible assets	2,119			3,446
Stock-based compensation	12,830			15,454
Total deferred tax assets	$	212,148		$	217,813
Valuation allowance	(199,698		)	(202,747		)
Net deferred tax assets	$	12,450		$	15,066
Deferred tax liabilities:
Depreciation	(203		)	(161		)
Convertible senior notes	(12,167		)	(14,941		)
Total deferred tax liabilities	$	(12,370	)	$	(15,102	)
Net deferred tax assets (liabilities)	$	80		$	(36	)

The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are scheduled to be deductible or taxable. Based on the available objective evidence, management believes it is more likely than not that the domestic net deferred tax assets will not be realizable. Accordingly, the Company has provided a full valuation allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of December 27, 2014 and December 28, 2013. In determining future taxable income, the Company makes assumptions to forecast federal, state and international operating income, the reversal of taxable temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require judgment regarding the forecasts of future taxable income and are consistent with the Company’s forecasts used to manage its business. The Company intends to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease, in the valuation allowance.

As of December 27, 2014, the Company has net operating loss carryforwards of approximately $309.1 million for federal tax purposes and $278.7 million for state tax purposes. The carryforward balance reflects expected utilization of both federal and state net operating losses for the year ended December 27, 2014. Additionally, the Company has federal and California research and development credits available to reduce future income taxes payable of approximately $28.0 million and $29.3 million, respectively, as of December 27, 2014. Infinera Canada Inc., an indirect wholly owned subsidiary, has Scientific Research and Experimental Development Expenditures ("SRED") credits available of $2.1 million to offset future Canadian income tax payable as of December 27, 2014. The federal research credits will begin to expire in the year 2021 if not utilized and the California research credits have no expiration date. Canadian SRED credits will begin to expire in the year 2030 if not fully utilized.

The Company maintains net operating losses generated from excess tax benefits associated with the accumulated stock award attributes in a memo account, not included in the deferred tax balances. The additional tax benefit associated with these stock award attributes, of which the net operating loss amounts are included in the carryforward amounts noted above is not recognized until the deduction reduces cash taxes payable. At December 27, 2014, the Company had unbenefited stock option deductions for federal and state tax purposes of $42.0 million and $37.8 million, respectively. When utilized, the estimated tax benefits of approximately $17.8 million will result in a credit to stockholders’ equity.

Under the Tax Reform Act of 1986, the amount of benefit from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50 percent as defined over a three-year testing period. As of December 27, 2014, the Company had determined that while ownership changes had occurred in the past, the resulting limitations were not significant enough to impact the utilization of the tax attributes against its taxable profits earned to date.

The Company’s policy with respect to its undistributed foreign subsidiaries’ earnings is to consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various foreign countries. At December 27, 2014, the undistributed earnings approximated $20.3 million. The future tax consequence of the remittance of these earnings is negligible because of the significant net operating loss carryforwards for U.S. and state purposes and full valuation allowance provided against such carryforwards.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):



	December 27, 2014			December 28, 2013			December 29, 2012
Beginning balance	$	15,148		$	13,902		$	13,066
Tax position related to current year
Additions	1,990			1,676			1,437
Tax positions related to prior years
Additions	140			32			75
Reductions	(76		)	(132		)	(580		)
Lapses of statute of limitations	(224		)	(330		)	(96		)
Ending balance	$	16,978		$	15,148		$	13,902

As of December 27, 2014, the cumulative unrecognized tax benefit was $17.0 million, of which $15.1 million was netted against deferred tax assets, which would have otherwise been subjected with a full valuation allowance. Of the total unrecognized tax benefit as of December 27, 2014, approximately $1.8 million, if recognized, would impact the Company’s effective tax rate.

As of December 27, 2014, December 28, 2013 and December 29, 2012, the Company had $0.4 million, $0.2 million and $0.2 million, respectively, of accrued interest or penalties related to unrecognized tax benefits, of which less than $0.2 million was included in the Company’s provision for income taxes in the year ended December 27, 2014, and less than $0.1 million was included in the Company’s provision for income taxes each for the years ended December 28, 2013 and December 29, 2012.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.

The Company is potentially subject to examination by the Internal Revenue Service and the relevant state income taxing authorities under the statute of limitations for years 2002 and forward.

The Company has received assessments of tax resulting from a transfer pricing examinations in India for fiscal years ended March 31, 2008 through March 31, 2009. The Company is appealing the assessment and does not expect a significant adjustment to unrecognized tax benefits as a result of this inquiry. Fiscal years subsequent to March 2009 remain open to examination in India.

The Company does not currently believe there to be a reasonable possibility of a significant change in total unrecognized tax benefits that would occur within the next 12 months and, as such, amounts are classified as other long-term liabilities on the accompanying consolidated balance sheets as of December 27, 2014.